Norwest Bank Minnesota Nat. Ass'n v. Sween Corp.

Decision Date20 February 1996
Docket NumberCiv. File No. 3-95-387.
Citation916 F. Supp. 1494
PartiesNORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Plaintiff, v. SWEEN CORPORATION, Maurice A. Sween, and Keith B. Brekke, Defendants.
CourtU.S. District Court — District of Minnesota

COPYRIGHT MATERIAL OMITTED

Thomas L. Kimer, Faegre & Benson, Minneapolis, MN, for plaintiff.

David Kenneth Hackley, Hackley Law Office, Minneapolis, MN, for Maurice A. Sween.

MEMORANDUM AND ORDER

MAGNUSON, Chief Judge.

INTRODUCTION

This matter is before the Court upon the parties' Cross-Motions for Summary Judgment. Also now before the Court is the Plaintiff's Motion to Amend its Complaint and to Dismiss Certain Defendants without prejudice.

The Plaintiff brought this action on the Defendant's refusal to pay for advisement service fees of about $2.9 million pursuant to an agreement entered by the parties in October 1994. Upon initial consideration of this matter, the Court raised the issue of subject-matter jurisdiction sua sponte, and requested the parties provide memoranda in response. The Plaintiff had asserted this Court has subject matter jurisdiction based on 28 U.S.C. §§ 1331, 1367 and 2201. The Court concluded that the Plaintiff inappropriately relied on § 2201 as conferring subject-matter jurisdiction, and questioned federal-question jurisdiction under §§ 1331 and 1367. See Memorandum and Order (Clerk Doc. No. 19).

In response, the Plaintiff agrees that its Complaint failed to raise a "substantial federal question" that would afford this Court jurisdiction under §§ 1331 and 1367. So that this Court would retain the case based on diversity jurisdiction, however, the Plaintiff now moves the Court to dismiss, without prejudice, Defendant Sween Corporation and Keith B. Brekke, and to permit it to amend its Complaint accordingly. The Defendants argue that, in fact, Count I is not a mere prediction of the Defendants' defense, but a necessary element to the Plaintiffs breach of contract claim in Count II. However, the Defendants do not dispute the Plaintiff's Motion to Amend its Complaint and to Dismiss the non-diverse Defendants. Because the Court grants the Plaintiffs' Motion to Amend, see Fed.R.Civ.P. 21 ("Parties may be dropped or added by order of the court on motion of any party ... at any stage of the action."); Fed.R.Civ.P. 15 (liberally permitting amendments to pleading by court leave or by written consent of the parties), the Court need not consider the Defendants' position that Count I is a required element of Count II, and therefore not merely a response to the Defendant's predicted defense.

FACTUAL BACKGROUND1

Sween Corporation (Sween) is a Minnesota corporation which develops and manufactures skin care products. Defendant Maurice Sween of Rochford, South Dakota, founded Sween in 1968. Mr. Sween was a chief executive officer and chairman of Sween Corporation's Board of Directors until February 28, 1995. Until February 28, 1995, when he owned nearly 90% of its shares, Mr. Sween owned the majority of Sween stock. Coloplast Corporation is a Georgia corporation, and is a wholly owned subsidiary of Coloplast A/S, a company incorporated in Denmark.

Keith Brekke is a resident of North Mankato, Minnesota. For at least 8 years, he was Vice President and General Manager of Sween Corp. Since December 1994 he has been chief executive officer of Sween. Until February 28, 1995, Brekke owned about 3% of Sween stock. Richard Ash and Marilyn Sween owned a total of about 7% of Sween stock. On February 28, 1995, Coloplast Corp. acquired all Sween stock from Defendants Maurice Sween and Keith Brekke, and from Ash and Marilyn Sween.

Norwest Bank Minnesota South Central, N.A., is a national bank established in Mankato, Minnesota, pursuant to the National Bank Act. All common stock of Norwest Bank Minnesota South Central is owned by Norwest Corporation. Norwest Corporation is a bank holding company under the Bank Holding Company Act. For at least five years, Norwest Bank Minnesota South Central has conducted banking business with Sween Corp., Maurice Sween and Brekke.

Norwest Bank Minnesota, N.A., is a national bank established in Minneapolis, Minnesota pursuant to the National Bank Act. It provides investment advisory services through its Norwest Corporate Finance Division, including advising clients on valuation issues relating to businesses, advising and assisting in the sale or purchase of businesses, capital raising activities, and general corporate finance activities. Norwest Corporate Finance is not a separate legal entity. Since its formation in 1979, Norwest Corporate Finance has represented over 50 sellers in merger transactions similar to its representation of Defendants.

Norwest Corporation owns the common stock of Lindeberg Financial Corporation and Norwest Holding Company. Norwest Corporation, either directly or through Lindeberg Financial Corporation and Norwest Holding Company, owns the common stock of Norwest Bank Minnesota. Norwest Bank Minnesota has not conducted any deposit loan or trust business with any of the Defendants.

From June 30, 1994, through March 1, 1995, Norwest Bank Minnesota employed R. Jeffrey Maas, Peter Slocum, and D. Christian Osborne in its Norwest Corporate Finance Division. Neither Maas, Slocum nor Osborne has ever been licensed as a broker or salesperson under Minnesota Statutes Chapter 82. Additionally, neither of them has ever been licensed as a securities broker or dealer by Minnesota or any federal authority. Maas is a Chartered Financial Analyst and a Registered Investment Advisor under the Securities and Exchange Commission (SEC).

Norwest Bank Minnesota has never applied to the Comptroller of the Currency (Comptroller) or the Federal Reserve Board (Fed) for permission to conduct investment advisory services through its Norwest Corporate Finance Division. As a national bank, Norwest Bank Minnesota is subject to regulation by the Comptroller of the Currency. The Comptroller of the Currency audited Norwest Corporate Finance in its April 23, 1991 examination of the fee-based services provided by Norwest Bank Minnesota. The Comptroller raised no questions or objections and did not comment upon the authority or ability of Norwest Bank Minnesota to conduct corporate finance through Norwest Corporate Finance.

Many national banks throughout the country have corporate finance divisions or departments which provide investment advisory services relating to mergers and acquisitions. For more than ten years Bankers Association for Corporate Finance ("BACF") has existed to provide an avenue for discussion and education about products and techniques relating to corporate finance activities including mergers and acquisitions. In 1994, the BACF had 27 bank members. The 1994 BACF Directory reflects that at least 10 of the member banks conduct their mergers and acquisitions investment advisory services through a division of a national banking association while others conduct the business through a separate subsidiary of either a national bank or bank holding company.

Norwest Bank Minnesota's Corporate Finance Division has performed services for the Defendants. In 1987 it performed business valuation services for Sween Corporation. Pursuant to an Engagement Agreement dated June 7, 1993, the Norwest Corporate Finance Division provided investment advisory services in connection with a potential acquisition for Sween. Brekke, as president of Sween, and Maas, on behalf of Norwest Corporate Finance Division, executed the Engagement Agreement.

In the summer of 1994, Maurice Sween contacted Maas, and advised him that the Sween Corp. shareholders wanted to explore possibilities relating to creating liquidity. Norwest Corporate Finance Division analyzed several alternatives. In an August 1994 meeting with Defendants, Norwest Corporate Finance Division presented alternatives, including a private sale of Sween, a public offer of Sween stock, and a partial sale of the Sween enterprise. Later, Maurice Sween contacted Maas and requested a proposal for selling Sween or its outstanding stock in a private sale. Norwest Corporate Finance Division then prepared and delivered to Defendants a draft Engagement Agreement regarding the sale of Sween.

Maas, Slocum and Osborne of Norwest Corporate Finance Division, and Defendants' attorney David K. Hackley, met at Norwest Corporate Finance offices. The parties negotiated the terms of the Engagement Agreement. Each made suggestions, changes and modifications. Norwest Corporate Finance Division provided a second draft Engagement Agreement and sent it to the Defendants and Hackley. Defendants with Hackley revised the Engagement Agreement further and forwarded it to Norwest. Following a phone conversation between Hackley and Maas, the Defendants prepared the final agreement on Sween stationery and forwarded it to Norwest with a check for the initial payment in the amount of $20,000. The Plaintiff and Defendants executed the Engagement Agreement on or about October 10, 1994. There was no agreement or understanding not reduced to writing, and there has been no subsequent modification of the agreement.

The Engagement Agreement authorizes Norwest Corporate Finance as the exclusive advisor to initiate negotiations regarding the sale of all or part of Sween Corporation. Prior to execution of the Agreement, there was no representation or agreement regarding how the sale would be accomplished.

Immediately after executing the Agreement, Norwest Corporate Finance prepared and circulated to prospective buyers an extensive brochure on computer disk and on paper. The brochure promoted Sween Corporation's products, personnel, past financial results, and future potential to a person acquiring it. Norwest Corporate Finance contacted over 135 potential buyers. By December 1994, it recommended to Defendants to narrow the list to four prospective purchasers who indicated an initial interest in purchasing Sween for...

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